The introduction of third-party funding in international arbitration matters in Malaysia – a welcome development

The Dewan Rakyat (House of Representatives) and Dewan Negara (Senate) recently passed the Arbitration (Amendment) Bill 2024 (the “Bill”). While the Bill introduces multiple changes to the Arbitration Act (the “Arbitration Act”), arguably its main purpose was to introduce regulation of third party funding in Malaysia. This can be seen from the fact that five of the Bill’s 14 pages are solely dedicated to third party funding. This write-up sheds light on the new rules that will govern third party funding in Malaysia.

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Third-party funding and how it works

In a third party funding arrangement, the funder provides the monetary resources to the claimant to cover legal costs in exchange for a portion of any financial recovery from the case. This arrangement allows parties with strong legal claims but insufficient funds to pursue their cases without bearing the financial risk.

Third party funders are very similar to investors. They invest in legal claims, which have a chance of being successful. No third party funder will fund an unmeritorious claim as this would not lead to any returns.

In Malaysia, there is sometimes the view that funders fund vexatious and unmeritorious claims, but this is generally a misconception: the funder typically conducts a thorough assessment of the case’s merits, potential recovery, and associated risks before deciding to invest. If the case is successful, the funder receives an agreed share of the award or settlement; if the case is lost, the funder generally loses its investment and does not receive any compensation.

As the outcome of legal cases is inherently uncertain, third party funding can be regarded as a high-risk investment strategy for the funder. As anyone in business will know, a high-risk investment strategy demands high returns – consequently, the potential returns for the funder can be substantial, usually expressed in a significant percentage of the recovery. To make their high-risk, high-returns strategy work overall, funders diversify their investments.

A closer look at the new rules regarding third party funding in Malaysia

Regulation of third party funding in Malaysia is introduced through nine sections of the Bill, Sections 46A through 46I, which we will discuss in the following:

Section 46A – Definitions

Section 46A provides a comprehensive set of definitions of the following terms:

1. “costs or expenses of the arbitration;”

2. “third party funder;”

3. “third party funding;”

4. “third party funding agreement;” as well as

5. “funded party.”

Many of the definitions appear to take inspiration from the definitions in Part 10A of the Hong Kong Arbitration Ordinance. This includes the definition of “funded party,” which is quite broad to allow both claimants and respondents in a (possible) arbitration as well as former parties to an arbitration to be funded. This could give the impression that funding may be obtained for enforcement proceedings. However, this is not clear from the wording of the Bill, which includes the term “receiving a financial benefit only if the arbitration is successful within the meaning of the third party funding agreement.”

We will address this point further below in greater detail.

Section 46B – Non-Application

Section 46B makes it clear that Chapter 2 of Part III of the Arbitration Act will not apply retrospectively. It will only apply from its “date of commencement” – which is the date it enters into force. It is not clear at this point when Chapter 2 will enter into force as the Minister may determine this date (also see below).

Section 46C – Rule against maintenance and champerty shall cease to apply

The High Court already made it clear in Quill Construction that maintenance and champerty do not apply. The Bill expressly clarifies this so that there can no longer be any doubt.

In similar fashion as Section 98K of the Hong Kong Arbitration Ordinance, Section 46C makes it clear that the rule of common law against maintenance and champerty, which is ordinarily applicable in Malaysia, particularly in the context of litigation, does not apply. The Arbitration Act as it currently stands is silent on whether third party funding is allowed and whether the rule against maintenance and champerty applies to third party funding. However, the wording of the new Section 46C, stating that the common law rule “against maintenance and champerty shall cease to apply” suggests that in the eyes of the lawmakers, the rule of maintenance and champerty applies to arbitration.

At least insofar as third party funding is concerned, Section 46C appears to confirm the position taken by the High Court in Quill Construction Sdn Bhd v. Tan Hor Teng & Anor [2006] 2 CLJ 358. In Quill Construction, the High Court held that the doctrines of champerty and maintenance were “defunct in this country” and could “no longer support tortious claims”, except where a plaintiff was duped into bringing an action at a gross undervalue (on the grounds of public policy).  

While the position in Quill Construction was in the context of litigation, it is difficult to see why it would have been any different in the context of arbitration, as the lawmakers seem to have surmised as well. Hence, save for this exception, third party funding was arguably allowable even before the present amendment.    

In any event, Section 46C now expressly clarifies that the rule against maintenance and champerty ceases to apply, without alloy. This makes clear that even the ground of public policy cannot be used to declare an agreement void, extending the position reached in Quill Construction. Further, Section 46C also clarifies that no funding agreement will be held to be contrary to public policy on the grounds of maintenance and champerty.  

Section 46D – Possibility to issue a Code of Practice

Section 46D leaves it to the Minister in the Prime Minister’s Department (Law and Institutional Reform) to issue a Code of Practice for third party funders. According to Section 46D, the five items such Code of Practice may cover contain are as follows:

1. the requirements on promotion of the third-party funding;

2. the requirements for a third-party funding agreement including the degree of control that a third-party funder will have in an arbitration;

3. criteria on third-party funders, such as their minimum capital requirements, etc.;

4. procedures for addressing potential, actual or perceived conflicts of interest; and

5. procedures for enhancing the protection of the funded party.

The Minister (Law and Institutional Reform) may issue a Code of Practice, which will ultimately govern what third party funders in Malaysia must (not do). However, as of 1 August 2024, no such Code of Practice has been published yet.

No draft version of the Code of Practice is currently available, and it will remain to be seen whether Chapter 2 will enter into force before such code is available. A point worth noting at this stage already, is that the Bill foresees that funders “are ordinarily expected to comply” with the Code of Practice (emphasis added). It is not clear whether this would mean that third party funders can depart from the code of practice in exceptional circumstances, as that would likely be impractical.

Section 46E – Non-compliance with the Code of Practice

Section 46E makes it clear that non-compliance with the Code of Practice will not in itself make the third party funder liable to any action or legal proceedings. However, Section 46E also clarifies that a funder’s compliance or non-compliance, as the case may be, may be taken into account in legal proceedings.  

Section 46F – Disclosure of information to third parties

Section 46F allows a party, which would ordinarily be required to keep an arbitration confidential, to any potential third party funder for the purpose of seeking or securing third party funding. However, such an approach to a potential third party funder is then itself bound by confidentiality except for limited circumstances.  

This includes “disclosure or communication is made to a professional or any other advisers for the purpose of obtaining advice relating to the third party funding” – funders will thus be in a position to obtain advice from a law firm unrelated to the potential arbitration in order to be able to better determine whether to fund proceedings or not.

Section 46G – Disclosure of information to others in the arbitration

In arbitration proceedings, the existence of third party funding as well as the name of the funder must be disclosed “to the other party to the arbitration and the arbitral tribunal.” There equally exists an obligation to disclose such information to “the court before which proceedings are brought in respect of the arbitration.”

The existence of the third party funding as well as the name of the funder must be disclosed in both arbitrations and court proceedings when proceedings are brought in respect of the arbitration. The opposing side will thus be fully aware whether a claim has been funded.

Disclosure must be made upon the commencement of the arbitration or court proceedings when the funding agreement was entered into before the initiation of the arbitration; when the funding agreement is entered into after the initiation of the arbitration or court proceedings, the funded party has fifteen days from the day the agreement is entered into.

Unfortunately, the Bill leaves it open what “[court] proceedings…in respect of the arbitration” are. This term is not defined in the Arbitration Act either.  

It is reasonably arguable that based on how third party funding ordinarily works as described above, the wording of the bill would cover all court proceedings after the end of an arbitration, i.e. proceedings relating to setting aside, recognition and enforcement of an arbitral award. If this were not the case, then it would defeat the purpose of the Bill, which is mainly to allow third party funding in the first place. This is because the arrangement is usually that the funder would only receive its remuneration once there is an award or settlement and hence the success.

Section 46A(c) supports this view as it acknowledges that the funder receives “a financial benefit only if the arbitration is successful within the meaning of the third party funding agreement”.  

However, one could also take view that the third party funding only covers the “arbitration proper”. An arbitration is over once the final award has been issued and thereafter, it is logically impossible that the funder receives “any financial benefit when the arbitration is successful” because the arbitration is already over.

Adopting this narrower approach – which would severely limit the application and ultimately hinder the success of third party funding in Malaysia – funding would only be available for those court proceedings, which are in assistance of the arbitration proper because of the limited powers of arbitral tribunals such as the court’s assistance in taking evidence according to section 29. However, under this approach, it would not be possible to fund enforcement proceedings.

Section 46G – Disclosure when funding ends

Once a party is no longer funded, it must communicate so to the other parties, the arbitral tribunal and, in case of proceedings in respect of the arbitration before a court. The party must also communicate the exact date when the funding agreement ended.  

Section 46I – Consequences of on-compliance with selected provisions of Chapter 2 or Part III

Section 46I contains a rule which is very similar to that of Section 46E and states that the non-compliance with Sections 46F, 46G and 46H in itself will not make the third party funder liable to any action or legal proceedings. As is the case for Section 46E, Section 46I equally clarifies that a funder’s compliance or non-compliance, as the case may be, may be taken into account in legal proceedings.  

Applicability to all arbitration proceedings in Malaysia and beyond

The Bill also amends Section 3 of the Act, which sets forth when the Act applies. The amendments make it clear that Chapter 2 of Part III (the provisions regarding third-party funding) applies to:

1. domestic arbitration (Section 3(2)(a));

2. international arbitration (Section 3(3)(a)); as well as

3. in international arbitrations, where the seat of arbitration is not in Malaysia or there is no seat of arbitration but any of the services in relation to the arbitration are provided in Malaysia (newly inserted Section 3A).  

Since the Arbitration Act also applies whenever “any of the services in relation to the arbitration are provided in Malaysia,” this could lead to conflicting situations and may severely limit the possibility of a Malaysian funder in its activities outside of Malaysia.

The authors understand that the new Section 3A serves the purpose of removing any doubt whether a Malaysian lawyer may act in funded arbitration proceedings even when the seat is not in Malaysia. It is doubtful whether this purpose has been achieved. Given the way that Section 3A is drafted, the Arbitration Act would apply independently of any other rules applying.

For instance, if a Malaysian law firm were to act for party in a Singapore-seated arbitration under a funded agreement, it would face various obligations under both the Singaporean regime as well as under the Malaysian regime. This can lead to conflicting situations, which in the worst case could mean that the Malaysian law firm may not be able to provide legal services altogether.  

Additionally, “any of the services in relation to the arbitration” also necessarily includes “funding services.” Thus, any third party funder set up in Malaysia (which would then provide services in relation an arbitration in Malaysia) would be limited in its activities by the Code of Practice to be established under the Arbitration Act.

This may severely limit the types of services a funder set up in Malaysia may provide given that in other countries, funding beyond arbitration has become the standard. Section 3A may thus be the end before the start of the establishment of an internationally active third party funding industry in Malaysia.

Way Forward

As mentioned above, it is not clear at this point when Chapter 2 of Part III of the Arbitration Act will enter into force since it is up to the Minister in the Prime Minister’s Department (Law and Institutional Reform). Rumour in legal circles has it that this will be around September 2024, but this is not clear at this point.  

As stated above, the Bill has been passed by both Houses of Parliament. Thereafter, the Bill will be presented to the Yang di-Pertuan Agong (“YDPA”), the Malaysian King, who shall give his royal assent within thirty days. If the Bill is not assented within the said thirty days, the Bill shall become law upon the expiry of thirty days as if the Bill had been assented to by the YDPA.  

Although it has become law, it shall not enter into force until it is published in the Gazette. This is where the Minister comes into play because the Bill will only come into force “on a date to be appointed by the Minister by notification in the Gazette”, and even then, “the Minister may appoint different dates for the coming into operation of different provisions of this Act.”

Hopefully, the ambiguity of whether third party funding can cover court proceedings after arbitration will be clarified, at least implicitly, by the Code of Practice.

We could thus potentially even see some changes of the Bill before it enters into force and given that there are currently no standards for third party funders available and that the Bill explicitly foresees the creation of a Code of Practice, for now, it appears that this is not an unlikely scenario.

It is the authors’ hope that the ambiguity of whether third party funding can cover court proceedings after arbitration (see above) will be clarified, at least implicitly, by the Code of Practice. In the meantime, funders need to carefully define what would constitute a “successful” arbitration in their third party funding contracts so that the validity of the arrangement cannot be legitimately challenged.  

Additional observations and critique

Third party funding has existed in Malaysia for quite a while, at least in proceedings with an international nexus. The Bill now sets forth rules which put a legal framework around third party funding and this is very welcome as such. Neighbouring Singapore overtook Malaysia many years ago in respect of international arbitration and allowing for third party funding, which Singapore has itself allowed many years ago, is one step in the right direction for Malaysia.

Of course, the Bill is a serious and valiant attempt at catching up to jurisdictions that possess a better standing in the global disputes market, including Singapore and Hong Kong. While the authors indubitably welcome this attempt, it appears that a measure of over-eagerness was had in its drafting, leading to some unfortunate (though minor) superficial errors throughout the Bill. The authors would therefore hope that such errors are corrected before the Bill is officially made law, as allowed under Standing Order 96(2) of the Standing Orders of Dewan Rakyat (as at June 2018).

Even if such corrections are not made, the authors welcome the bill as at the very least, it will lead to better knowledge about third party funding in Malaysia. The disputes industry in Malaysia has a lot of room for growth and when funders are willing to back at least some of those claims, which are not bought because of a lack of financial resources, this is going to benefit the Malaysian economy overall.

Practical advice for companies wishing to obtain third party funding

Like a potential investor, a third party funder needs to be convinced that it should invest in a claim. This requires presenting a claim in a specific way, which very few law firms in Malaysia are familiar with. To maximise the possibility of having your claim funded, we highly recommend approaching a firm law with experience in third party funding to assist you.

Companies which wish to have their own claim funded – be it because they lack the necessary funds, because they wish to leverage their risk, or for any other reason – are strongly advised to speak to a law firm experience with third party funding before they speak to a funder. The demand for third party funding is high and funders only take on a certain number of cases.

Like with any investment, the decision whether to invest (= to fund) or not is a measure of the expected returns on the one hand and the involved risk on the other hand. It is of utmost importance to present both points to a third party funder in the correct way so that the funder does not lose interest in the funding before the matter has even been properly presented.  

This article was written by Prof. Dr. Harald Sippel (Indepedent Arbitrator), and our partners Raja Nadhil Aqran and Vishnu Vijandran. It only contains general information and does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.